The soft drink industry has been a profitable one in spite of the “cola wars” between the two
largest players. Several factors contribute to this profitability, and these factors also help to show why the profitability of the concentrate production site of the industry has been so much greater than the bottling side. Over the years the concentrate producers have experimented with different levels of vertical integration, and although it has not necessarily been clear which have been more successful historically, some decision criteria can be developed to help determine if and when complete vertical integration is necessary.
Profitability in the soft drink market
As analysis using Porter’s five forces shows why the soft drink industry has been so
profitable. Suppliers and buyers have not had more power over the industry than it has had over them. Internal rivalry, while seeming intense, has not eroded the profitability of the industry because of its concentration and the fact that the two major players have primarily competed on the basis of advertising and promotion and not price. Entry is difficult both for reasons of scale and the strong brand identity of the current major players. Substitutes have not been close enough to take away significant market share, although the emergence of
new substitutes may pose the largest threat to the industry’s profitability.
Suppliers and Buyers
Suppliers to the soft drink industry are, for the most part, providing commodity products and thus have little power over the industry. Sugar, bottles and cans are homogenous goods that can be obtained from many sources, and the aluminum can industry has been plagued by excess supply. The one necessary ingredient which is unique is the artificial sweetener; aspartame is clearly preferred by consumers of diet beverages and for a time was under patent protection and therefore only available from one supplier. However the patent expired and another producer entered, reducing the market power of NutraSweet. Buyers can be considered at the customer or the retail level. For consumers, taste will be an important part of the preference for a particular soft drink; thus although there is no monetary switching cost, there may be a loss of enjoyment associated with a less-preferred brand. Because of this, consumers have historically been brand-loyal and not based purchase decision on price.